In a long, comprehensive and very detailed paper which a short blog post cannot do justice, Piketty and Zucman put together a new macro-historical data set examine wealth to income ratios over the period 1700 to 2010 for eight developed countries. They discover that the ratio of wealth to income is going up again to levels not seen since the late 18th and early 19th centuries. They find:
“ in every country a gradual rise of wealth-income ratios in recent decades, from about 200-300% in 1970 to 400-600% in 2010. In effect, today’s ratios appear to be returning to the high values observed in Europe in the eighteenth and nineteenth centuries (600-700%).”
So, tomorrow is yesterday. Why? Two reasons. First, there is a long-term upward trend in relative asset prices. Whereas before the First World War, capital markets were relatively unfettered, the combination of world war in the twentieth century (which blew up a lot of capital) and policies that limited capital mobility reduced the return on capital. This by extension depressed the growth of wealth. Second, the twentieth century particularly after the Second World War and up until the 1970s saw high-income growth. However, since the 1970s, there has been a slowdown in productivity and income growth. Again, in their words: “In short: capital is back because low growth is back.” Of course, a rising wealth to income ratio could have future implications for tax policy but for that you should read the paper.
I suppose one question is whether or not economic historians several hundred years from now will view the economic expansion of the twentieth century and the broadening of wealth and income as merely a short-term aberration resulting from the industrialization phase. The role of the two world wars in “blowing up the capital stock” and setting the stage for the post war recovery and boom is also another interesting if somewhat depressing variable to contemplate. However, I think much of the post-war boom was also fueled by the baby boom – which I suppose could be seen as pent-up demand from the years of war and austerity.
The baby boom and demographics in general are important to
economic history. The one variable
that Piketty and Zucman don’t seem to mention in their reasons for the upward
trend in the wealth to income ratio since 1970 in developed countries is the
effect of an aging population. A
big difference between Europe of the late 18th century and Europe
today is life-expectancy:
populations are a lot older now as so many more live beyond age 65. Wealth rises with age whereas working
income eventually drops off so wealth to income ratios naturally will rise with
age. This would make the current
high wealth-income ratios less alarming from an inequality perspective than
they would be in the much younger population of the late 18th
century. Moreover, in the long run the inequality may be at least partially self-correcting. After all, as fertility rates fall and the aging baby boom embarks on the "Great Dying", one might expect to eventually see excess supply in assets and increased demand for labour again affecting the balance between wealth and income. However, we have to live through the short run to get there.